Umbrella and excess liability insurance coverages are designed to protect you or your business against claims when the policies providing your primary liability coverage (e.g., auto, home, commercial general liability) are not enough. Car crashes, injuries to people visiting your home, and injuries to people visiting your business or using your products can occasionally expose a person, family, or business to claims in excess of, or not covered by primary liability policies. This is where umbrella, and/or excess liability policies can help. But they aren’t the same thing.
Umbrella policies are designed to provide both excess and primary coverage. They offer “vertical” coverage by providing additional limits above the underlying primary insurance and “horizontal” coverage by filling gaps where primary policies do not provide coverage. This means an umbrella policy can “drop-down” to provide primary coverage for certain risks not covered by underlying policies, acting as a gap-filler. Umbrella policies essentially have two main functions: (1) to provide a higher liability for losses that are typically covered by liability insurance and (2) to provide coverage for less common losses that are not typically covered by liability insurance.
Excess liability coverage, on the other hand, strictly provides additional coverage above the limits of the primary insurance policy. It only kicks in after the primary policy’s limits have been exhausted and does not offer any primary coverage for risks not covered by the underlying policy. Excess policies are typically more straightforward and less comprehensive than umbrella policies, focusing solely on providing higher limits of liability. And, of course, they are typically less expensive.
According to a recent Wall Street Journal article, the cost of both umbrella and excess liability coverage is rising (Big Umbrella Policies Now Harder to Get; WSJ, Aug. 1, 2024). Claims that a few years ago would have been fully covered by auto, home, and commercial liability policies are triggering umbrella coverage more often, forcing the cost of such coverage up. The increase is partly due to inflation. The overall cost of settling claims has been affected by rising prices for repairs, medical bills, and lost wage claims. And while the cost of all insurance products has generally gone up, policyholders have, for the most part, maintained the coverage limits they had prior to the current inflationary cycle. The result is that claims that only a few years ago could have been settled within the limits of most auto, home, and business liability policies are now more likely to result in excess liability claims. This increased demand for umbrella and excess liability coverage is driving up the cost of the second layer of coverage.
Not only is the cost of umbrella and excess liability insurance going up, but insurers are becoming choosier about who they will agree to cover. Blemishes on an applicant’s record that in the past would likely have been overlooked, or accepted with a minor premium adjustment, are now resulting in coverage being declined. Alternatively, insurers may be willing to issue a policy, but not at the higher limits that the applicant seeks to purchase.
If you have or are thinking about obtaining umbrella or excess liability insurance, you typically want to purchase a policy with limits that will be at least equal to your net worth (or, for commercial policies, the net worth of your company). After all, this is typically going to be the highest amount, more or less, that you or your business stand to lose in a lawsuit.
Contact Gregory E. O’Brien at 216-621-7860 for more information.